Why should you save - and how much?
Most parents want to give their child a helping hand for when they reach adulthood, but their savings goal might just be "as much as possible". Though you can't know what the future holds, it helps to have a clear goal in mind. Here are some of the things you might plan for:
- Higher education: From 2012/13, universities can charge up to £9,000 a year in tuition fees.
- Buying a house: The average price of a house in England and Wales is around £162,080 (Land Registry, December 2012), so a first time buyer needs around £32,416 to put down a 20% deposit.
- Getting married: According to the latest information from CompareWeddingInsurance.org.uk couples are spending, on average, £14,441 on getting married in 2012 compared to £15,541 the previous year.
What's different about saving for a child?
Children, like adults, have a personal tax allowance, which is £9,440 for the tax year 2013-2014. This means they can earn that amount - for example in interest from savings - without paying any tax.
When a parent or step parent saves for a child and the money you give your child earns more than £100 interest a year, this interest will be taxed as if it were your own. If the funds originated from someone other than a parent or are insufficient to generate £100 interest parents should ask for Form R85 when opening an account for their child to ensure that the account is registered to receive gross interest.
The same will apply to your child's other parent, so if you both save on behalf of your child, the total limit on interest is £200.
What help is available from HMRC?
If you want to save a lump sum for when your child is 18, there are two main types of tax-efficient accounts that can help. Which type you can have will depend on the age of your child. They are:
- Child Trust Funds
- Junior ISAs
Both these accounts let you save up to a maximum amount each year and are designed to pay out when your child reaches 18. If that's not what you're looking for, you'll find some other suggestions at the end of this article.
Child Trust Funds (no longer available as new accounts)
The Child Trust Fund is a government initiative that is now being phased out for new accounts. Existing accounts may continue to receive subscriptions. Child Trust Funds were available for children born between 1 September 2002 and 2 January 2011.
If your child falls into this age range, and you meet certain other criteria (for example, claiming child benefit) your child probably has a Child Trust Fund already. If you didn't open the account yourself, HM Revenue and Customs should have opened it for you.
What you need to know about Child Trust Funds
- The government paid an initial deposit into the Child Trust Fund (between £50 and £250).
- Payments into a Child Trust Fund are limited to £3,720 per year (These years run from birthday to birthday and not in line with tax years).
- Any return from the fund is tax exempt.
- Your child can access the fund when he or she is 18.
- Some of the details of the fund depend on the provider.
Junior ISAs
Junior ISAs are the new replacement for Child Trust Funds. They are only available to children who don't have a Child Trust Fund.
This generally means two groups - children born before 1 September 2002, and children born after 2 Jan 2011. So if you want to start an account for your new baby, this is one to consider.
What you need to know about Junior ISAs
- Payments into a Junior ISA are limited to £3,720 each tax year.
- There are two types - cash ISAs and stocks and shares ISAs. You can open one of each for your child, but you're still limited to £3,720 per year spread between the two of them.
- Any return from the ISA is tax free.
- Your child can access the ISA when he or she is 18.
- Some of the details of the ISA will depend on the provider.
Note: At the current time HSBC does not offer a Junior ISA.
More on Junior ISAs from Gov.uk.
Saving for a child in the short-term
If you want to save more than £3,720 a year and to be able to access the money before your child is 18, there are other options available and may offer you more flexibility.
Some HSBC accounts you could consider:
- If you want to pay in or take out as much as you want at any point, you might be interested in the Future Saver for Children.
- If you want a savings account that you or your child can control, for saving pocket money or work from their job, you might choose MySavings.
The value of investments (and any income received from them) can fall as well as rise and you may not get back what you invested. For some investments this can also happen as a result of exchange rate fluctuations as shares and funds may have an exposure to overseas markets.
Stock market investments normally need a commitment of at least five years. Any money held within a Child Trust Funds or a Junior ISA may not be accessed until the child turns 18. Please be aware that the value of tax benefits will depend on your individual circumstances, and tax rules may change in the future.
